Research articles for the 2020-07-18

Bank Recapitalization, Bank Performance and Real Sector Lending: An Analysis of Indonesia’s Economic Recovery from the Crises of 1997-1998
Simatupang, Batara
SSRN
This study examines the impact of banks’ recapitalization on the performance of banks and the effectiveness of real sector lending in Indonesia. The study was based on the recapitalization bonds issued by the Indonesian government as part of the program to restructure and revitalize the Indonesian-banking sector following the economic crisis that occurred in 1997-1998. The genesis of the crisis that knocked Indonesia over was triggered by the contagion-effect. It started with the downfall of the Thai Bath on 2 July 1997. The crisis in Indonesia could be placed in the third-generation model of crisis which focuses on how the banking sector might cause a currency crisis. To stabilize the economy and recover the society’s confidence, the government took action to stabilize the banking system. The banking recapitalization and restructuring program was formalized under the Indonesian Banking Restructuring Agency. The bank recapitalization was by the injection of government bonds totaling up to IDR430.4 trillion to 36 banks. This was considered as “too big or too important to fail.”This study’s findings (from the empirical analysis of the performance of all recapitalized banks after the capital injection in 1999 and 2000) showed that generally, the performance of banks has significantly improved. Starting from one year, through to five years post-recapitalization, the analysis indicated that the recapitalization had no impact in lowering the provision of non-performing loans, costs-income ratio, and growth of the loan to deposits ratio. This condition made the performance of banks seem to be better, but, from the macro-economic point of view, the ‘good performance’ was an illusion. It caused the recapitalized banks to have as their dominant assets the recapitalization bonds and Bank Indonesia’s Certificates.The effectiveness of banks’ recapitalization to real sector lending was proven to be diverse among the different groups of banks. The behavior of banks concerning changes in economic fundamentals remained static, even with capital injection, except for the growth of loans in the regional banks. Based on the individual sectors, four sectors showed stagnant or negative growth. On the whole, the fiscal cost of the recapitalization program could not directly help in accelerating the economic recovery from the crisis, contrary to the Claessens, Klingebiel, and Laeven (2001) research findings that a package of specific resolution measures can help accelerate the recovery from such crisis with significant fiscal costs.The implications from both internal and external banking were found to be many and varied. Of course, as long as the recapitalization bonds gave higher gains than those from the other portfolio of the banks, the banks preferred to hold and maintain the bonds as a source of interest income that has no risks and which hides behind the argument of maintaining their capital adequacy ratio (CAR). Again, the bank's disinter-mediation reduced the effectiveness of monetary policies during the crisis and in the post-crisis period in Indonesia.We wish to recommend that the periphery of the real sector be expanded to make the banks the engines of growth. We strongly recommend that the central bank should institute sanctions against banks, which keep large amounts of un-disbursement loans. Such banks should be encouraged in the first place to link these funds to the investment prospects in the economy to increase the role of the recapitalized banks in the economic recovery process. To encourage and accelerate the development of the various sectors such as agriculture sector, mining sector, electricity, water & gas sector, and trade, hotel & restaurant sector. We recommend that the government and the central bank should periodically announce the regulations and lending targets for the different sectors.

Inventory Investment and Cash Flow Sensitivity: Evidence From Turkish Firms
Tan, Omer,Avcı, Emin
SSRN
Purpose - This study analyzes the inventory investment â€" cash flow sensitivity for 166 manufacturing firms in Turkey listed in Borsa Istanbul. The time spans 2006-2018.Methodology - Based on the previous literature, Lovell’s (1961) target adjustment model is used. The baseline equation model is estimated by the system Generalized Method of Moments (GMM).Findings- The relationship between inventory investment and cash flow is statistically positive for constrained firms, while insignificant for unconstrained firms according to all models. The effect of Gross Domestic Product (GDP) on inventory investment is positive and significant for both constrained and unconstrained firms, this implies that GDP contributes to an increase in inventory investment.Conclusion- This study is the first one that analyzes the inventory investment and cash flow relationships for Turkish manufacturing firms and wants to fulfill this gap in the literature. It is found that cash flow is positively significant for constrained firms according to size and age classification criteria.

Passive Investment and Stock Repurchase Activity
Bratten, Brian,Huang, Meng,Payne, Jeff L.
SSRN
There is a long line of research illustrating the role of institutional investors in shaping firms’ policies and monitoring firms’ performance and financial reporting quality. In recent years, however, the growth in institutional investment has been disproportionately fueled by the expansion of passively managed funds. Unlike active funds, passive funds buy specific stocks to track market indices and do not modify their holdings based on company performance, economic events, or management decisions. In this study we investigate the association between passive investment and one important management decision, share repurchases, which are at historically high levels and the subject of considerable scrutiny. We report that firms with more passive ownership are more likely to repurchase, repurchase more shares and spend more money on repurchases. We also find that increased passive investment is positively associated with repurchases that result in reported earnings that meets or beats analysts’ earnings forecasts, or “suspect” repurchases. In contrast, we find no association between active investment and suspect repurchases. Finally, we investigate future outcomes of firms’ repurchases. We find that passive investment lowers the association between repurchases and firms’ future employment, future capital expenditures, and future performance. We conclude that passive investment is associated with an increase in the quantity and a reduction in the quality of firms’ repurchase activity.